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Microsoft, Sega end gaming relationship

Two months after Microsoft Corporation pre-announced its Xbox game console, the company has broken off its relationship with Sega, makers of the Dreamcast game console. The two companies had worked together on the launch of the Dreamcast, which offered an optional interface to Microsoft's DirectX technology running on Windows CE. But few developers took advantage of the CE option on the Dreamcast, opening a rift of sorts between the two companies. And while the introduction of the Xbox probably didn't help matters much, the final nail in the coffin was actually an inability to reach an agreement on Sega's plans to network-enable the Dreamcast. So Sega will develop its SegaNet gaming network without Microsoft and the two companies will meet face to face in the market next spring when the Xbox is released.

"Our business with Microsoft is finished," said Sega chairman Isao Okawa at a news conference last week. "Microsoft no longer has any interest in the network business." And with new products from Sony, Microsoft, and Nintendo appearing over the next several months, SegaNet is at the heart of Sega's Dreamcast strategy. After a quick start, the Dreamcast has fallen behind with disappointing sales and dazzling marketing by Sony for its next-generation PlayStation 2 device, which is marketed as an all-in-one home entertainment set-top box. To set its Dreamcast apart from rivals, Sega is hoping to establish itself as the online powerhouse in the games console market.

The first step down this path came last month, when Sega began offering free Dreamcast hardware to gamers that signed up for two years of SegaNet Internet access, which will launch in September in the United States and Canada. A similar scheme is already underway in Japan as well, though it hasn't sold particularly well. Sega says this has more to do with slow acceptance of the Internet in Japan than the quality of the online gaming experience; the company expects sales in North America to be better. However, the company has plans to educate users about other online benefits such as email and Web browsing, opening the device to a larger audience.

Though Sony's PlayStation 2 doesn't offer any online option yet, the Microsoft Xbox will ship with an integrated network card when it's released in early 2001. So Sega has less than a year to establish itself before the next generation arrives